Accounting is the formal collection, aggregation, analysis, and reporting of financial and non-financial data of a company to you.
Some of the financial and non-financial reporting are compulsory and companies are required to release this periodically, typically quarterly.
There are three types of accounting Financial Accounting, Managerial Accounting and Tax Accounting.
Financial Accounting gives the information about the company to us.
Managerial Accounting gives the information about the company to the managers.
Tax Accounting is the estimation of taxes to be paid and the compliance with tax disclosures.
The primary purpose of Financial accounting is to inform outsiders about the financial performance and the health of the company which will assist them in their decision making. This can be used for valuation purposes by equity investors and investment banks or for assessment of credit risk by banks and suppliers.
The secondary purpose of financial accounting is to monitor and evaluate the performance of managers, and to ensure that the managers use the company’s resources responsibly.
Financial accounting communicates to you through financial statements and additional disclosures, all of which are a part of the company’s quarterly and annual reports. These reports are audited to maintain accuracy and conformity in accordance with the accounting rules.
The primary purpose of managerial accounting is to provide information for decision making within the company. The information provided through managerial accounting helps determining product costs, profitability and pricing, determining product mix, introducing and discontinuing products, capacity planning and determining production volumes.
The secondary purpose of managerial accounting is to get performance data and to execute cost control. Unlike financial accounting reports, there is no fixed formats for managerial accounting reports, also they don’t have to be audited.
Tax accounting provides information to tax authorities.
A key element of financial accounting is the idea of Accruals.